What Deductions Can Salaried Employees Claim?

Because employers are generally required to pay for the premises, assets and supplies used up by their employees in performing their duties, the employees themselves have few out-of-pocket costs to claim on the tax return. In some cases, the employee will have expenditures, but to claim them, very specific procedures must be followed.

For example, the employer, must verify in writing on Form T2200, Declaration of Conditions of Employment, that no expense reimbursement was provided to the employee and that the out-of-pocket payments were required as a condition of employment. Partial reimbursements must be declared before expenses are claimable.

Provided that step is met, examples of deductible expenses include supplies used up directly in the work (stationery, maps, etc.), salaries paid to an assistant (including spouses or children if Fair Market Value (FMV) is actually paid for work actually performed) and office rent or certain home office expenses. Form T777 Statement of Employment Expenses must be completed.

Certain specific profiles of employees may have special types of expenses, specific to their work, which can be claimed. For example, employed artists are allowed to claim the cost of supplies used up in their employment to a maximum of 20% of net income or $1,000, while and long distance truck drivers may claim the cost of board and lodging according to specific rules while en route – up to 80% of costs in most cases.

Commissioned salespeople may have promotions and entertainment costs as well as travel, auto or home office expenses.

In addition, certain tradespersons may claim the cost of tools purchased (in excess of a threshold amount) if required by their employer for use in their employment ($500 maximum claim). Loggers may claim certain power saw costs.

Employed teachers can claim a new refundable tax credit for the first time in 2016: the Teacher and Early Childhood Educator School Supply Tax Credit is worth a maximum of $150 (15% of $1000) and can include consumable items such as construction paper, art and science supplies, stationary and pens or pencils, containers, posters, games, puzzles, books, software and so on.

For more guidance on the deductible expenses of employees, consult a DFA-Tax Services Specialist™.

Pre-Budget Analysis: Finance Canada Priorities

A Federal budget date is expected soon after Prime Minister Trudeau and Finance Minister Morneau return from this week’s meetings with the new U.S. administration. Two important reports have been issued recently to provide insight into some of the thinking about risks and responses in our financial world: Finance Canada’s 2016-2017 Report on Plans and Priorities and the Bank of Canada’s January 18, 2017 Monetary Policy Report. Taken together, they provide a good crystal ball on the economic matters that may shape some of the government’s thinking as it delivers its second budget this year.

The Finance Department’s Report reflects on the recent stalling of growth in the Canadian economy and puts the blame largely on two factors: crude oil pricing and what it calls the “overall week and fragile global economic situation” in which we have lived and worked since 2014.

At the time this report was produced, Finance Canada particularly has its eye on the weakened economies in Europe, the politically-charged Middle East and slowing growth common to most other countries around the world.

Emerging markets, in particular, the report notes, will be impacted by the “normalization” of U. S. monetary policy. To that end it has outlined its top three risks meeting its priorities and it will be interesting to see if they come up in the US-Canada meetings and the budget:

  1. Strategic planning and policy recommendations will continue to be difficult. The uncertainty and volatility in the global economy will challenge the Department’s ability to provide accurate strategic advice and policy recommendations. It plans to manage those risks by monitoring global indicators, conducting private sector surveys of the Canadian economic outlook and meeting regularly with private sector economists.
  2. Challenges to the integrity and reputation of the Canadian financial system will require infrastructure and resources. This challenge is to be met by ongoing specialized staff training initiatives, monitoring of events and the need to develop new initiatives in response.
  3. Security. This is an ongoing issue for government. The finance department plans to collaborate with Shared Services Canada to implement new departmental approaches to increased security for networks, desktops and their applications.

More recently, however, the Bank of Canada is monitoring five risks that have evolved since October, 2016:

  1. Stronger real GDP growth in the U. S.
  2. The notable shift towards protectionist global trade policies
  3. Higher commodity prices
  4. Sluggish business investment in Canada
  5. Weaker household spending due to a rise in savings rates and a decline in national housing resale activity all the while that household debt continues to rise
  6. Higher global long-term interest rates

At the end of Budget Day, what’s important to taxpayers and their advisors is how Finance Canada will focus its priorities on changes to the tax system. Here the Finance Department’s Report notes its priorities will include the continued advice and analysis on ways to improve the tax system in four key ways: through fairness, neutrality, efficiency and simplicity. Expect the upcoming budget to take aim at “poorly targeted” tax expenditures and “inefficient measures” that erode the tax base.

Finance Canada, which is a department established in 1867 – 150 years ago – plays a critical role in executing on its mandate: helping government “develop and implement strong and sustainable economic, fiscal, tax, social, security, international and financial sector policies and programs. It plays an important central agency role, working with other departments to ensure that the government’s agenda is carried out and that ministers are supported with high-quality analysis and advice.”

Specifically, the report itemizes the Finance Department’s top seven responsibilities:

  1. Preparing the federal Budget and the fall Update of Economic and Fiscal Projections;
  2. Preparing the Annual Financial Report of the Government of Canada and, in cooperation with the Treasury Board of Canada Secretariat and the Receiver General for Canada, the Public Accounts of Canada;
  3. Developing tax and tariff policy and legislation;
  4. Managing federal borrowing on financial markets;
  5. Designing and administering major transfers of federal funds to the provinces and territories;
  6. Developing financial sector policy and legislation; and
  7. Representing Canada in various international financial institutions and organizations.

In an increasingly complex world, this is a tall order. The next crystal ball to the financial future is just around the corner. We’ll look forward to reporting on the Federal Budget measures and soliciting your thoughts on it.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.

Additional Educational Resources: DAC Conference – for a strategic look at the issues that shape tax and economic policy in Canada and what they mean to professional advisors and their clients, please join us Nov 5 to 8 in Kelowna.

Interest Deductibility Varies on Investment Activities

When can you claim the interest on investment loans? It’s a common question but the answer depends on the investment for which you are borrowing money. In order to claim the interest when you borrow money to invest, your loan must meet three criteria.

First, the interest costs must be payable during the taxation year in question. Secondly, those costs must be reasonable. Finally, (and most importantly), the borrowed money must be invested to earn business income (considered to be “active” in nature) or income from property (considered to be “passive” in nature).

The deduction for interest expenses is possible even if the underlying asset has not produced profits yet. There simply needs to be the potential to earn qualifying income like interest, dividends, rents or royalties.

If you dispose of an investment that you borrowed money to invest in and it has lost significant value, you may continue to write off the interest on the loan as if the underlying asset still existed. But the original asset must be traceable to the loan. If you dispose of the asset at a loss, or the asset no longer exists, you may continue to write off the interest costs so long as the proceeds were used to pay down the loan amount.

What expenses can’t be claimed? The government won’t let you deduct the interest on loans used to fund registered investments. So, you’re out of luck if you borrow money to invest in your workplace pension plan, an RRSP (Registered Retirement Savings Plan), a PRPP (Pooled Retirement Pension Plan), an RESP (Registered Education Savings Plan), or a RDSP (Registered Disability Savings Plan).

An exception is interest paid on loans that are used to top up past service contributions to a registered pension plan, such as your workplace defined benefit or defined contribution pension plan. These costs may be deducted as part of the RPP contribution.

Another red flag: don’t deduct interest on loans you took to acquire assets that produce tax-exempt income, such as your TFSA (Tax Free Savings Account) or your principal residence.

Similarly, you generally cannot claim interest on a loan used to make life insurance premium payments. But an exception exists if the policy is used as collateral for a business loan and the beneficiary is the lender. Check this out with a tax services specialist.

Finally, remember this important principle: Investments in assets that produce only capital gains are excluded from the definition of qualifying income for the purpose of interest deductibility. For example, If you acquire common shares from a company that has stated it will not issue dividends, you may not be able to deduct interest on any money you borrow to purchase those shares. That’s a trap for many investors in an audit. If, however, there is a possibility that dividends may be paid in the future, deductibility of the interest costs on the loan is legitimate.

The Bottom Line. If you have borrowed to invest, or paid investment counsel fees, chances are you’ll have a deduction against all other income as a carrying charge on Line 221. But to make it real, you have to make the loan traceable to income-producing investments.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading educator in the tax and financial services, and author of 52 books on family tax preparation and planning.